Edgar Filing: COLUMBIA BANKING SYSTEM INC

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2007.

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission File Number 0-20288

COLUMBIA BANKING SYSTEM, INC.

(Exact name of issuer as specified in its charter)

Washington

91-1422237

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

1301 “A” Street

Tacoma, Washington

98402-2156

(Address of principal executive offices)

(Zip Code)

(253) 305-1900

(Issuer’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨ Accelerated filers x Non-accelerated filer ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The number of shares of common stock outstanding at July 31, 2007 was 17,892,199

TABLE OF CONTENTS


		Page
PART I — FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited)

	Consolidated Condensed Statements of Income - three months and six months ended June 30, 2007 and 2006	1

	Consolidated Condensed Balance Sheets – June 30, 2007 and December 31, 2006	2

	Consolidated Condensed Statements of Changes in Shareholders’ Equity - six months ended June 30, 2007 and 2006	3

	Consolidated Condensed Statements of Cash Flows - six months ended June 30, 2007 and 2006	4

	Notes to Unaudited Consolidated Condensed Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	22

Item 4.	Controls and Procedures	23

PART II — OTHER INFORMATION

Item 1.	Legal Proceedings	23

Item 1A.	Risk Factors	23

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	23

Item 3.	Defaults Upon Senior Securities	23

Item 4.	Submission of Matters to a Vote of Security Holders	23

Item 5.	Other Information	23

Item 6.	Exhibits	24

	Signatures	25

PART I - FINANCIAL INFORMATION

Item 1.

FINANCIAL STATEMENTS

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

Columbia Banking System, Inc.

(Unaudited)


	Three Months Ended June 30,					Six Months Ended June 30,
*(in thousands except per share)*	2007		2006			2007		2006
*Interest Income*
Loans	$	36,224	$	30,328		$	70,254	$	58,972
Taxable securities		4,657		5,208			9,442		10,166
Tax-exempt securities		1,960		1,753			3,920		3,180
Federal funds sold and deposits with banks		414		121			785		161

Total interest income		43,255		37,410			84,401		72,479
*Interest Expense*
Deposits		13,617		9,408			25,776		17,899
Federal Home Loan Bank advances		2,484		3,206			5,663		4,974
Long-term obligations		513		492			1,020		951
Other borrowings		946		2			1,544		47

Total interest expense		17,560		13,108			34,003		23,871

*Net Interest Income*		25,695		24,302			50,398		48,608
Provision for loan and lease losses		329		250			967		465

Net interest income after provision for loan and lease losses		25,366		24,052			49,431		48,143
*Noninterest Income*
Service charges and other fees		3,293		2,907			6,252		5,741
Merchant services fees		2,124		2,174			4,093		4,212
Gain on sale of securities available for sale, net		—		—			—		10
Bank owned life insurance (“BOLI”)		451		434			877		833
Other		873		752			1,696		1,444

Total noninterest income		6,741		6,267			12,918		12,240
*Noninterest Expense*
Compensation and employee benefits		10,848		9,426			22,206		19,095
Occupancy		2,945		2,685			5,782		5,333
Merchant processing		884		887			1,707		1,671
Advertising and promotion		657		854			1,204		1,506
Data processing		553		520			1,120		1,320
Legal and professional services		687		737			1,510		967
Taxes, licenses and fees		703		640			1,316		1,236
Gain on sale of other real estate owned, net		—		(11	)		—		(11	)
Interest rate floor valuation adjustment		—		1,775			—		1,775
Other		2,989		3,623			5,823		6,584

Total noninterest expense		20,266		21,136			40,668		39,476

Income before income taxes		11,841		9,183			21,681		20,907
Provision for income taxes		3,297		1,944			5,854		5,480

*Net Income*	$	8,544	$	7,239		$	15,827	$	15,427

Net income per common share:
Basic	$	.53	$	.45		$	.98	$	.97
Diluted		.53		.45			.97		.96
Dividends paid per common share	$	.17	$	.14		$	.32	$	.27
Average number of common shares outstanding		16,126		15,937			16,115		15,907
Average number of diluted common shares outstanding		16,258		16,115			16,261		16,095

See accompanying notes to unaudited consolidated condensed financial statements.

CONSOLIDATED CONDENSED BALANCE SHEETS

Columbia Banking System, Inc.

(Unaudited)


*(in thousands)*			June 30, 2007			December 31, 2006
ASSETS
Cash and due from banks			$	69,829		$	76,365
Interest-earning deposits with banks				15,070			13,979
Federal funds sold				6,600			14,000

Total cash and cash equivalents				91,499			104,344
Securities available for sale at fair value (amortized cost of $570,891 and $598,703, respectively)				558,716			592,858
Securities held to maturity at cost (fair value of $1,618 and $1,871, respectively)				1,573			1,822
Federal Home Loan Bank stock at cost				10,453			10,453
Loans held for sale				2,551			933
Loans, net of deferred loan fees of ($3,281) and ($2,940), respectively				1,859,592			1,708,962
Less: allowance for loan and lease losses				21,339			20,182

Loans, net				1,838,253			1,688,780
Interest receivable				13,349			12,549
Premises and equipment, net				44,959			44,635
Goodwill				29,723			29,723
Other assets				69,870			67,034

Total Assets			$	2,660,946		$	2,553,131

LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest-bearing			$	419,695		$	432,293
Interest-bearing				1,697,630			1,591,058

Total deposits				2,117,325			2,023,351
Short-term borrowings:
Federal Home Loan Bank advances				161,700			205,800
Securities sold under agreements to repurchase				70,000			20,000
Other borrowings				49			198

Total short-term borrowings				231,749			225,998
Long-term subordinated debt				22,411			22,378
Other liabilities				29,688			29,057

Total liabilities				2,401,173			2,300,784
Commitments and contingent liabilities				—			—
Shareholders’ equity:
Preferred stock (no par value) Authorized, 2 million shares; none outstanding				—			—

	June 30, 2007	December 31, 2006
Common stock (no par value)
Authorized shares	63,034	63,034
Issued and outstanding	16,166	16,060		168,401			166,763
Retained earnings				99,701			89,037
Accumulated other comprehensive loss				(8,329	)		(3,453	)

Total shareholders’ equity				259,773			252,347

Total Liabilities and Shareholders’ Equity			$	2,660,946		$	2,553,131

See accompanying notes to unaudited consolidated condensed financial statements.

CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Columbia Banking System, Inc.

(Unaudited)


	Common stock										Accumulated Other			Total
	Number of Shares	Amount			Retained Earnings			Deferred Compensation			Comprehensive Loss			Shareholders’ Equity
	(in thousands)
Balance at January 1, 2006	15,831	$	163,065		$	66,051		$	(92	)	$	(2,782	)	$	226,242
Comprehensive income:
Net income	—		—			15,427			—			—			15,427
Other comprehensive loss, net of tax:
Net unrealized loss from securities, net of reclassification adjustments	—		—			—			—			(7,616	)		(7,616	)

Total comprehensive income															7,811
Transition adjustment related to adoption of SFAS 123(R)	—		(92	)		—			92			—			—
Issuance of stock under equity compensation plan	122		1,433			—			—			—			1,433
Issuance of restricted stock under equity compensation plan	71		328			—			—			—			328
Tax benefit associated with exercise of stock options	—		730			—			—			—			730
Cash dividends paid on common stock	—		—			(4,303	)		—			—			(4,303	)

Balance at June 30, 2006	16,024	$	165,464		$	77,175		$	—		$	(10,398	)	$	232,241

Balance at January 1, 2007	16,060	$	166,763		$	89,037		$	—		$	(3,453	)	$	252,347
Comprehensive income:
Net income	—		—			15,827			—			—			15,827
Other comprehensive loss, net of tax:
Net unrealized loss from securities, net of reclassification adjustments	—		—			—			—			(4,063	)		(4,063	)
Net unrealized loss from cash flow hedging instruments	—		—			—			—			(813	)		(813	)

Total comprehensive income															10,951
Issuance of stock under stock option and other plans	64		986			—			—			—			986
Stock award compensation expense	42		368			—			—			—			368
Stock option compensation expense	—		92			—			—			—			92
Tax benefit associated with exercise of stock options	—		192			—			—			—			192
Cash dividends paid on common stock	—		—			(5,163	)		—			—			(5,163	)

Balance at June 30, 2007	16,166	$	168,401		$	99,701		$	—		$	(8,329	)	$	259,773

See accompanying notes to unaudited consolidated condensed financial statements.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

Columbia Banking System, Inc.

(Unaudited)


	Six Months Ended June 30,
*(in thousands)*	2007			2006
Operating Activities
Net income	$	15,827		$	15,427
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan and lease losses		967			465
Deferred income tax benefit		(960	)		(133	)
Excess tax benefit from stock-based compensation		(63	)		(94	)
Stock-based compensation expense		460			328
Gain on sale of investment securities		—			(10	)
Gain on sale of other real estate owned and other personal property owned		—			(11	)
Depreciation, amortization and accretion		3,043			3,121
Net realized gains on sale of assets		(2	)		(36	)
Net change in:
Loans held for sale		(1,618	)		562
Interest receivable		(800	)		130
Interest payable		1,159			798
Other assets		(614	)		(2,144	)
Other liabilities		(266	)		(2,926	)

Net cash provided by operating activities		17,133			15,477
Investing Activities
Purchases of securities available for sale		(2,388	)		(136,077	)
Proceeds from sales of securities available for sale		—			3,865
Proceeds from principal repayments and maturities of securities available for sale		29,554			53,253
Proceeds from maturities of securities held to maturity		250			—
Loans originated and acquired, net of principal collected		(150,510	)		(59,885	)
Purchases of premises and equipment		(2,691	)		(2,401	)
Proceeds from disposal of premises and equipment		196			88
Proceeds from sales of other real estate and other personal property owned		—			29

Net cash used in investing activities		(125,589	)		(141,128	)
Financing Activities
Net increase (decrease) in deposits		93,974			(42,741	)
Proceeds from Federal Home Loan Bank advances		1,635,250			1,369,220
Repayment of Federal Home Loan Bank advances		(1,679,350	)		(1,160,620	)
Net increase in repurchase agreement borrowings		50,000			—
Net decrease other borrowings		(149	)		(2,500	)
Cash dividends paid on common stock		(5,163	)		(4,303	)
Proceeds from issuance of common stock, net		986			1,433
Excess tax benefit from stock-based compensation		63			94

Net cash provided by financing activities		95,611			160,583
Increase (decrease) in cash and cash equivalents		(12,845	)		34,932
Cash and cash equivalents at beginning of period		104,344			100,406

Cash and cash equivalents at end of period	$	91,499		$	135,338

Supplemental disclosures of cash flow information:
Cash paid for interest	$	32,844		$	23,073
Cash paid for income taxes		6,550			8,660

See accompanying notes to unaudited consolidated condensed financial statements.

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

Columbia Banking System, Inc.

1. Basis of Presentation and Significant Accounting Policies

(a)

Basis of Presentation

The interim unaudited consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for condensed interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain financial information and footnotes have been omitted or condensed. The consolidated condensed financial statements include the accounts of the Company, and its wholly owned banking subsidiaries Columbia Bank and Bank of Astoria (“Astoria”). All intercompany transactions and accounts have been eliminated in consolidation. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement of the results for the interim periods presented have been included. The results of operations for the six months ended June 30, 2007 are not necessarily indicative of results to be anticipated for the year ending December 31, 2007. The accompanying interim unaudited consolidated condensed financial statements should be read in conjunction with the financial statements and related notes contained in the Company’s 2006 Annual Report on Form 10-K.

(b)

Significant Accounting Policies

The significant accounting policies used in preparation of our consolidated financial statements are disclosed in our 2006 Annual Report on Form 10-K. There have not been any other material changes in our significant accounting policies compared to those contained in our 2006 10-K disclosure for the year ended December 31, 2006.

2. Recent Developments

Acquisition of Mountain Bank Holding Company: On March 28, 2007, the Company announced the signing of a definitive merger agreement with Mountain Bank Holding Company, the parent company of Mt. Rainier National Bank, Enumclaw, Washington, in a cash-and-stock transaction valued at approximately $60 million (including value to option holders). Subsequent to quarter-end, on July 23, 2007, the acquisition of Mountain Bank Holding Company was completed and Mt. Rainier National Bank was merged into Columbia State Bank doing business as Mt. Rainier Bank. Mountain Bank Holding Company shareholders received $11.25 in cash and 0.4231 of Columbia Banking System shares for each share of Mountain Bank Holding Company common stock. Mt. Rainier National Bank was formed in 1990 to serve the banking needs of the Enumclaw community. Since then, Mt. Rainier National Bank has expanded into several adjacent King County communities and into two markets in Pierce County. As of March 31, 2007, Mountain Bank had approximately $236 million in total assets, $170 million in net loans, $209 million in deposits and $23 million in shareholders’ equity.

Acquisition of Town Center Bancorp: On March 28, 2007, the Company announced the signing of a definitive merger agreement with Town Center Bancorp, the parent company of Town Center Bank, Portland, Oregon, in a cash-and-stock transaction valued at approximately $45.1 million (including value to option holders). Subsequent to quarter-end, on July 23, 2007, the acquisition of Town Center Bancorp was completed and Town Center Bank was merged into Columbia State Bank. Town Center Bancorp shareholders received $9.382 in cash and 0.3391 of Columbia Banking System shares for each share of Town Center Bancorp common stock. Founded in 1997, Town Center Bank offers banking services to individuals, professionals and small business clients throughout the Portland Metropolitan area. As of March 31, 2007, Town Center Bancorp had consolidated total assets of approximately $135 million, net loans of $105 million, $105 million in deposits and stockholders’ equity of $14 million.

Adoption of FIN 48: Effective January 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting for Uncertainties in Income Taxes, an Interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 prescribes a comprehensive model for how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that it has taken or expects to take on a tax return. As of June 30, 2007 and January 1, 2007, we had no unrecognized tax benefits. Our policy is to recognize interest and penalties on unrecognized tax benefits in “Provision for income taxes” in the Consolidated Statements of Income. There were no amounts related to interest and penalties recognized for the six months ended June 30, 2007. The tax years subject to examination by federal and state taxing authorities are the years ending December 31, 2006, 2005 and 2004.

3. Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share for the three and six month periods ended June 30, 2007 and 2006 (in thousands, except for per share data):


	For The Three Months Ended 6/30/2007		For The Three Months Ended 6/30/2006		For The Six Months Ended 6/30/2007		For The Six Months Ended 6/30/2006
Net income	$	8,544	$	7,239	$	15,827	$	15,427

Weighted average common shares outstanding (for basic calculation)		16,126		15,937		16,115		15,907
Dilutive effect of outstanding common stock options		132		178		146		188

Weighted average common stock and common equivalent shares outstanding (for diluted calculation)		16,258		16,115		16,261		16,095

Earnings per common share – basic	$	0.53	$	0.45	$	0.98	$	0.97

Earnings per common share – diluted	$	0.53	$	0.45	$	0.97	$	0.96

Potential dilutive shares are excluded from the computation of earnings per share if their effect is anti-dilutive. For the three and six month periods ended June 30, 2007 and June 30, 2006 there were no anti-dilutive shares outstanding related to options to acquire common stock.

4. Dividends

On January 25, 2007, the Company declared a quarterly cash dividend of $0.15 per share, payable on February 21, 2007 to shareholders of record as of the close of business on February 7, 2007. On April 25, 2007, the Company declared a quarterly cash dividend of $0.17 per share, payable on May 23, 2007, to shareholders of record at the close of business May 9, 2007. Subsequent to quarter end, on July 26, 2007, the Company declared a quarterly cash dividend of $0.17 per share, payable on August 22, 2007, to shareholders of record at the close of business August 8, 2007. The payment of cash dividends is subject to Federal regulatory requirements for capital levels and other restrictions. In addition, the cash dividends paid by Columbia Bank and Bank of Astoria to the Company are subject to both Federal and State regulatory requirements.

5. Business Segment Information

The Company is managed along two major lines of business within the Columbia Bank banking subsidiary: commercial banking and retail banking. The treasury function of the Company, included in the “Other” category, although not considered a line of business, is responsible for the management of investments and interest rate risk. The Bank of Astoria banking subsidiary operates as a stand-alone segment of the Company.

The Company generates segment results that include balances directly attributable to business line activities. The financial results of each segment are derived from the Company’s general ledger system. Overhead, including sales and back office support functions and other indirect expenses are not allocated to the major lines of business. Since the Company is not specifically organized around lines of business, most reportable segments comprise more than one operating activity.

The principal activities conducted by commercial banking are the origination of commercial business loans, private banking services and real estate lending. Retail banking includes all deposit products, with their related fee income, and all consumer loan products as well as commercial loan products offered in the Company’s branch offices.

The organizational structure of the Company and its business line financial results are not necessarily comparable with information from other financial institutions. Financial highlights by lines of business are as follows:

Condensed Statements of Income:


	Three Months Ended June 30, 2007
				Columbia Bank
*(in thousands)*	Bank of Astoria			Commercial Banking			Retail Banking			Other			Total
Net interest income after provision for loan and lease loss	$	2,185		$	6,947		$	16,858		$	(624	)	$	25,366
Other income		388			725			1,635			3,993			6,741
Other expense		(1,578	)		(2,575	)		(4,975	)		(11,138	)		(20,266	)

Contribution to overhead and profit		995			5,097			13,518			(7,769	)		11,841
Income taxes														(3,297	)

Net income													$	8,544

Total assets	$	221,109		$	1,354,301		$	446,216		$	639,320		$	2,660,946


	Three Months Ended June 30, 2006
				Columbia Bank
*(in thousands)*	Bank of Astoria			Commercial Banking			Retail Banking			Other			Total
Net interest income after provision for loan and lease loss	$	2,073		$	5,666		$	17,710		$	(1,397	)	$	24,052
Other income		404			450			1,552			3,861			6,267
Other expense		(1,495	)		(2,278	)		(4,468	)		(12,895	)		(21,136	)

Contribution to overhead and profit		982			3,838			14,794			(10,431	)		9,183
Income taxes														(1,944	)

Net income													$	7,239

Total assets	$	213,993		$	1,121,709		$	453,398		$	755,498		$	2,544,598


	Six Months Ended June 30, 2007
				Columbia Bank
*(in thousands)*	Bank of Astoria			Commercial Banking			Retail Banking			Other			Total
Net interest income after provision for loan and lease loss	$	4,271		$	13,403		$	33,511		$	(1,754	)	$	49,431
Other income		770			1,360			3,125			7,663			12,918
Other expense		(3,022	)		(5,378	)		(9,737	)		(22,531	)		(40,668	)

Contribution to overhead and profit		2,019			9,385			26,899			(16,622	)		21,681
Income taxes														(5,854	)

Net income													$	15,827

Total assets	$	221,109		$	1,354,301		$	446,216		$	639,320		$	2,660,946


	Six Months Ended June 30, 2006
				Columbia Bank
*(in thousands)*	Bank of Astoria			Commercial Banking			Retail Banking			Other			Total
Net interest income after provision for loan and lease loss	$	4,141		$	11,405		$	34,990		$	(2,393	)	$	48,143
Other income		776			933			3,092			7,439			12,240
Other expense		(2,888	)		(4,855	)		(8,955	)		(22,778	)		(39,476	)

Contribution to overhead and profit		2,029			7,483			29,127			(17,732	)		20,907
Income taxes														(5,480	)

Net income													$	15,427

Total assets	$	213,993		$	1,121,709		$	453,398		$	755,498		$	2,544,598

6. Comprehensive Income

The components of comprehensive income are as follows:


	Three Months Ended June 30,
*(in thousands)*	2007			2006
Net income as reported	$	8,544		$	7,239
Unrealized loss from securities:
Net unrealized loss from available for sale securities arising during the period, net of tax of $(3,782) and $(2,726)		(6,851	)		(4,996	)

Unrealized loss from cash flow hedging instruments:
Net unrealized loss arising during the period, net of tax of $(480) and $0		(881	)		—
Reclassification adjustment of losses included in income, net of tax of $5 and $0		10			—

Net unrealized loss from cash flow hedging instruments		(871	)		—

Total comprehensive income	$	822		$	2,243


	Six Months Ended June 30,
*(in thousands)*	2007			2006
Net income as reported	$	15,827		$	15,427
Unrealized loss from securities:
Net unrealized loss from available for sale securities arising during the period, net of tax of $(2,267) and $(4,191)		(4,063	)		(7,610	)
Reclassification of net gain from available for sale securities included in net income, net of tax of $0 and $(4)		—			(6	)

Net unrealized loss from securities, net of reclassification adjustments		(4,063	)		(7,616	)

Unrealized loss from cash flow hedging instruments:
Net unrealized loss arising during the period, net of tax of $(451) and $0		(826	)		—
Reclassification adjustment of losses included in income, net of tax of $7 and $0		13			—

Net unrealized loss from cash flow hedging instruments		(813	)		—

Total comprehensive income	$	10,951		$	7,811

7. Allowance for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit

The Company maintains an allowance for loan and lease losses to absorb losses inherent in the loan portfolio. The size of the allowance is determined through quarterly assessments of the estimated probable losses in the loan portfolio. The Company’s methodology for making such assessments and determining the adequacy of the allowance includes a general valuation allowance consistent with SFAS No. 5, “Accounting for Contingencies” and criticized/classified loss reserves on specific relationships. Specific allowances for identified problem loans are determined in accordance with SFAS No. 114, “Accounting by Creditors for Impairment of a Loan”.

On a quarterly basis the Chief Credit Officer of the Company reviews with Executive Management and the Board of Directors the various additional factors that management considers when determining the adequacy of the allowance, including economic and business condition reviews. These factors include general economic and business conditions affecting the Company’s market place, credit quality trends, including trends in nonperforming loans, collateral values, seasoning of the loan portfolio, bank regulatory examination results, findings of internal credit examiners and the duration of current business cycles. The allowance is increased by provisions charged to income, and is reduced by loans charged-off, net of recoveries. While management believes it uses the best information available to determine the allowance for loan losses, unforeseen market conditions could result in adjustments to the allowance, and net income could be affected, if circumstances differ from the assumptions used in determining the allowance.

The following table presents activity in the allowance for loan and lease losses for the three and six months ended June 30, 2007 and 2006:


	Three Months Ended June 30,						Six Months Ended June 30,
*(in thousands)*	2007			2006			2007			2006
Beginning balance	$	20,819		$	20,691		$	20,182		$	20,829
Provision charged to expense		329			250			967			465
Loans charged-off		(175	)		(140	)		(326	)		(581	)
Recoveries		366			189			516			277

Ending balance	$	21,339		$	20,990		$	21,339		$	20,990

Changes in the allowance for unfunded loan commitments and letters of credit are summarized as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
*(in thousands)*	2007		2006		2007		2006
Beginning balance	$	339	$	339	$	339	$	339
Net changes in the allowance for unfunded loan commitments and letters of credit		—		—		—		—

Ending balance	$	339	$	339	$	339	$	339

8. Goodwill and Intangible Assets

The Company had $29.7 million in goodwill at June 30, 2007 and December 31, 2006. At June 30, 2007 and December 31, 2006, the Company had a core deposit intangible (“CDI”) asset of $2.8 million and $2.9 million, respectively. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”, goodwill is not amortized but is reviewed for

potential impairment during the third quarter on an annual basis, or if events or circumstances indicate a potential impairment, at the reporting unit level. An impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value. The CDI is evaluated for impairment if events and circumstances indicate a possible impairment based on undiscounted cash flow projections. The CDI is amortized on an accelerated basis over an estimated life of approximately 10 years. Amortization expense related to the CDI was $96,000 and $192,000 for the three and six months ended June 30, 2007, respectively, and $113,000 and $226,000 for the three and six months ended June 30, 2006, respectively. Amortization expense related to the CDI is included in other noninterest expense on the consolidated condensed statements of income.

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Columbia Banking System, Inc.

This discussion should be read in conjunction with the unaudited consolidated condensed financial statements of Columbia Banking System, Inc. (referred to in this report as “we”, “our”, and “the Company”) and notes thereto presented elsewhere in this report and with the December 31, 2006 audited consolidated financial statements and its accompanying notes included in our recent Annual Report on Form 10-K. In the following discussion, unless otherwise noted, references to increases or decreases in average balances in items of income and expense for a particular period and balances at a particular date refer to the comparison with corresponding amounts for the period or date one year earlier.

NOTE REGARDING FORWARD LOOKING STATEMENTS

This Quarterly Report on Form 10-Q may be deemed to include forward looking statements, which management believes to be a benefit to shareholders. These forward looking statements describe management’s expectations regarding future events and developments such as future operating results, growth in loans and deposits, continued success of our style of banking and the strength of the local economy. The words “will,” “believe,” “expect,” “should,” and “anticipate” and words of similar construction are intended in part to help identify forward looking statements. Future events are difficult to predict, and the expectations described above are necessarily subject to risk and uncertainty that may cause actual results to differ materially and adversely. In addition to discussions about risks and uncertainties set forth from time to time in our filings with the SEC, factors that may cause actual results to differ materially from those contemplated by such forward looking statements include, among others, the following possibilities: (1) local, national, and international economic conditions are less favorable than expected or have a more direct and pronounced effect on us than expected and adversely affect our ability to continue internal growth at historical rates and maintain the quality of our earning assets; (2) changes in interest rates reduce interest margins more than expected and negatively affect funding sources; (3) projected business increases following strategic expansion or opening or acquiring new branches are lower than expected; (4) costs or difficulties related to the integration of acquisitions are greater than expected; (5) competitive pressure among financial institutions increases significantly; (6) legislation or regulatory requirements or changes adversely affect the businesses in which we’re engaged; and (7) our ability to realize the efficiencies we expect to receive from our investments in personnel and infrastructure.

CRITICAL ACCOUNTING POLICIES

Management has identified the accounting policies related to the allowance for loan and lease losses as critical to an understanding of our financial statements. These policies and related estimates are discussed in “Item 7. Management Discussion and Analysis of Financial Condition and Results of Operation” under the heading “Allowance for Loan and Lease Losses and Unfunded Loan Commitments and Letters of Credit” in our 2006 Annual Report on Form 10-K. There have not been any material changes in our critical accounting policies relating to the allowance for loan and lease losses as compared to those disclosed in our 2006 Annual Report on Form 10-K.

RESULTS OF OPERATIONS

Our results of operations are dependent to a large degree on our net interest income. We also generate noninterest income through service charges and fees, merchant services fees, and bank owned life insurance. Our operating expenses consist primarily of compensation and employee benefits, occupancy, merchant card processing, data processing and legal and professional fees. Like most financial institutions, our interest income and cost of funds are affected significantly by general economic conditions, particularly changes in market interest rates, and by government policies and actions of regulatory authorities.

Net Interest Income

For the three months ended June 30, 2007, we experienced compression of our net interest margin when compared to the same period in 2006. This compression resulted from increased funding costs. For the second quarter of 2007, interest income and interest expense increased 16% and 34%, respectively, when compared to the same period in 2006. The increase in interest income for the period is primarily due to increased loan volume whereas the increase in interest expense is primarily due to rate increases on interest bearing deposits. For the six months ended June 30, 2007, interest income increased 16% over the same period in 2006 whereas interest expense increased 42%. Similar to the quarterly results, the increase in interest income in the first half of the year was driven primarily by loan growth and the increase in interest expense by rate increases on interest bearing deposits.

The following tables set forth the average balances of all major categories of interest-earning assets and interest-bearing liabilities, the total dollar amounts of interest income on interest-earning assets and interest expense on interest-bearing liabilities, the average yield earned on interest-earning assets and average rate paid on interest-bearing liabilities by category and in total, net interest income and net interest margin.


	Three months ending June 30,						Three months ending June 30,
	2007						2006
*(in thousands)*	Average Balances (1)		Interest Earned / Paid		Average Rate		Average Balances (1)		Interest Earned / Paid		Average Rate
ASSETS
Loans, net	$	1,846,163	$	36,224	7.87	%	$	1,613,253	$	30,328	7.54	%
Securities (2)		582,378		7,692	5.30	%		645,343		7,929	4.93	%
Interest-earning deposits with banks and federal funds sold		32,062		414	5.18	%		9,663		121	5.02	%

Total interest-earning assets		2,460,603	$	44,330	7.23	%		2,268,259	$	38,378	6.79	%
Other earning assets		39,196						37,502
Noninterest-earning assets		155,064						174,824

Total assets	$	2,654,863					$	2,480,585

LIABILITIES AND SHAREHOLDERS’ EQUITY
Certificates of deposit	$	604,307	$	6,613	4.39	%	$	535,153	$	4,945	3.71	%
Savings accounts		105,089		109	0.42	%		117,355		107	0.37	%
Interest-bearing demand and money market accounts		960,729		6,894	2.88	%		868,278		4,356	2.01	%

Total interest-bearing deposits		1,670,125		13,616	3.27	%		1,520,786		9,408	2.48	%
Federal Home Loan Bank advances		180,952		2,485	5.51	%		250,812		3,206	5.13	%
Securities sold under agreements to repurchase		70,000		945	5.41	%		—		—	—
Other borrowings and interest-bearing liabilities		263		2	2.60	%		246		2	1.52	%
Long-term subordinated debt		22,401		512	9.17	%		22,334		492	8.84	%

Total interest-bearing liabilities		1,943,741		17,560	3.62	%		1,794,178		13,108	2.93	%
Noninterest-bearing deposits		420,148						428,822
Other noninterest-bearing liabilities		28,069						24,971
Shareholders’ equity		262,905						232,614

Total liabilities & shareholders’ equity	$	2,654,863					$	2,480,585

Net interest income (2)			$	26,770					$	25,270

Net interest margin					4.36	%					4.47	%

(1)	Nonaccrual loans have been included in the tables as loans carrying a zero yield. Amortized net deferred loan fees were included in the interest income calculations. The amortization of net deferred loan fees was $706,000 and $372,000 for the three months ended June 30, 2007 and 2006, respectively.

(2)	Tax-exempt income is calculated on a tax equivalent basis, based on a marginal tax rate of 35%.


	Six months ending June 30,						Six months ending June 30,
	2007						2006
*(in thousands)*	Average Balances (1)		Interest Earned/ Paid		Average Rate		Average Balances (1)		Interest Earned/ Paid		Average Rate
ASSETS
Loans, net	$	1,806,150	$	70,254	7.84	%	$	1,590,560	$	58,972	7.48	%
Securities (2)		590,122		15,512	5.30	%		632,457		15,106	4.82	%
Interest-earning deposits with banks and federal funds sold		30,404		785	4.96	%		6,762		161	4.80	%

Total interest-earning assets		2,426,676	$	86,551	7.19	%		2,229,779	$	74,239	6.71	%
Other earning assets		38,987						37,308
Noninterest-earning assets		154,971						167,800

Total assets	$	2,620,634					$	2,434,887

LIABILITIES AND SHAREHOLDERS’ EQUITY
Certificates of deposit	$	580,748	$	12,454	4.32	%	$	532,795	$	9,506	3.60	%
Savings accounts		107,139		218	0.41	%		118,553		215	0.37	%
Interest-bearing demand and money market accounts		941,178		13,103	2.81	%		864,654		8,178	1.91	%

Total interest-bearing deposits		1,629,065		25,775	3.19	%		1,516,002		17,899	2.38	%
Federal Home Loan Bank advances		206,953		5,664	5.52	%		201,486		4,974	4.98	%
Securities sold under agreements to repurchase		57,293		1,540	5.42	%		—		—	—
Other borrowings and interest-bearing liabilities		308		4	2.62	%		1,454		47	6.47	%
Long-term subordinated debt		22,392		1,020	9.18	%		22,326		951	8.59	%

Total interest-bearing liabilities		1,916,011		34,003	3.58	%		1,741,268		23,871	2.76	%
Noninterest-bearing deposits		416,886						436,711
Other noninterest-bearing liabilities		28,120						25,057
Shareholders’ equity		259,617						231,851

Total liabilities & shareholders’ equity	$	2,620,634					$	2,434,887

Net interest income (2)			$	52,548					$	50,368

Net interest margin					4.37	%					4.56	%

(1)

Nonaccrual loans have been included in the tables as loans carrying a zero yield. Amortized net deferred loan fees were included in the interest income calculations. The amortization of net deferred loan fees was $1.3 million and $1.1 million for the six months ended June 30, 2007 and 2006, respectively.

(2)	Tax-exempt income is calculated on a tax equivalent basis, based on a marginal tax rate of 35%.

The following tables set forth the total dollar amount of change in interest income and interest expense. The changes have been segregated for each major category of interest-earning assets and interest-bearing liabilities into amounts attributable to changes in volume, changes in rates and changes in rates multiplied by volume. Changes attributable to the combined effect of volume and interest rates have been allocated proportionately to the changes due to volume and the changes due to interest rates:


*(in thousands)*	Three Months Ended June 30, 2007 Compared to 2006 Increase (Decrease) Due to
	Volume			Rate			Total
Interest Income
Loans (1)	$	4,570		$	1,326		$	5,896
Securities (2)		(832	)		595			(237	)
Interest earning deposits with banks and federal funds sold		289			4			293

Interest income (2)	$	4,027		$	1,925		$	5,952

Interest Expense
Deposits:
Certificates of deposit	$	757		$	911		$	1,668
Savings accounts		(13	)		15			2
Interest-bearing demand and money market accounts		663			1,875			2,538

Total interest on deposits		1,407			2,801			4,208
Federal Home Loan Bank advances		(959	)		238			(721	)
Securities sold under agreements to repurchase		945			—			945
Long-term subordinated debt		2			18			20
Other borrowings and interest bearing liabilities		—			—			—

Interest expense	$	1,395		$	3,057		$	4,452

(1) Nonaccrual loans have been included in the tables as loans carrying a zero yield. Amortized net deferred loan fees were included in the interest income calculations. The amortization of net deferred loan fees was $706,000 and $372,000 for the three months ended June 30, 2007 and 2006, respectively. (2) Tax-exempt income is calculated on a tax equivalent basis, based on a marginal tax rate of 35%.

*(in thousands)*	Six Months Ended June 30, 2007 Compared to 2006 Increase (Decrease) Due to
	Volume			Rate			Total
Interest Income
Loans (1)	$	8,386		$	2,896		$	11,282
Securities (2)		(1,113	)		1,519			406
Interest earning deposits with banks and federal funds sold		610			14			624

Interest income (2)	$	7,883		$	4,429		$	12,312

Interest Expense
Deposits:
Certificates of deposit	$	1,028		$	1,920		$	2,948
Savings accounts		(23	)		26			3
Interest-bearing demand and money market accounts		1,065			3,860			4,925

Total interest on deposits		2,070			5,806			7,876
Federal Home Loan Bank advances		150			540			690
Securities sold under agreements to repurchase		1,540			—			1,540
Long-term subordinated debt		3			66			69
Other borrowings and interest bearing liabilities		(15	)		(28	)		(43	)

Interest expense	$	3,748		$	6,384		$	10,132

(1)

(2)	Tax-exempt income is calculated on a tax equivalent basis, based on a marginal tax rate of 35%.

Provision for Loan and Lease Losses

During the second quarter of 2007, the Company allocated $329,000 to its provision for loan and lease losses, compared to $250,000 for the same period in 2006. For the six months ended June 30, 2007, the Company allocated $967,000 to its provision for loan and lease losses, compared to $465,000 for the first half of 2006. The increased allocation is primarily the result of a higher rate of loan growth for the first half of 2007 compared to the same period in 2006.

Noninterest Income

Noninterest income increased $474,000 or 8% to $6.7 million for the second quarter of 2007 from $6.3 million for the second quarter of 2006. The increase in noninterest income is primarily due to increased service charges and other fees. Service charges and other fees increased $386,000, or 13%, during the second quarter of 2007 as compared to the same period in 2006. This increase is the result of an increase in our deposit account fee structure in conjunction with an increase in the average balance of deposit accounts.

For the six months ended June 30, 2007, noninterest income increased $678,000, or 6%, compared to the same period in 2006. This increase is, again, primarily attributable to increased service charges and other fees which increased 9% in the first half of 2007 compared to the same period in 2006. Merchant services revenue was virtually unchanged in the second quarter 2007 from the same period in 2006 but was down 3% for the first half of 2007 when compared to the first half of 2006. Other noninterest income increased $252,000, or 17%, in the first half of 2007 compared to the same period in 2006. This increase was driven largely by an increase in our mortgage banking production coupled with syndication and loan prepayment fees.

Noninterest Expense

Total noninterest expense decreased $870,000, or 4%, for the second quarter of 2007 from $21.1 million for the second quarter of 2006. However, this decrease is primarily attributed to the mark-to-market adjustment associated with our interest rate floor instruments recognized through earnings in the second quarter of 2006. The valuation adjustment for the interest rate floors resulted in a pre-tax, non-cash expense for the second quarter 2006 of $1.8 million. Notwithstanding the effects of that adjustment, total noninterest expense increased $905,000, or 5%, for the second quarter of 2007 compared to the same period in 2006. This increase is primarily a result of increased compensation and employee benefits and occupancy expenses offset with reduced advertising and promotion expenses. Compensation and employee benefits expense increased $1.4 million in the second quarter of 2007 as compared to the same period in 2006. Virtually all of the increase in compensation and benefit expense was associated with the expansion of our retail branch and commercial lending units. Occupancy expenses increased $260,000 from the second quarter of 2006 primarily due to costs associated with branch expansion in the King and Thurston County markets coupled with a general increase in prevailing rents of existing facilities. Advertising and promotion expenses decreased 23% in the second quarter of 2007 compared to the same period in 2006 as a result of production expenses related to television commercials incurred in the second quarter of 2006.

Total noninterest expense for the first six months of 2007 increased $1.2 million, or 3%, as compared to the same period in 2006. As described above, this decrease also reflects the mark-to-market adjustment associated with our interest rate floor instruments. The valuation adjustment for the interest rate floors resulted in a pre-tax, non-cash expense for the second quarter 2006 of $1.8 million. Notwithstanding the effects of that adjustment, noninterest expense for the period increased $3.0 million, or 8%, compared to the first half of 2006. This increase is due primarily to increased compensation and employee benefits as described above. Legal and professional services increased $543,000 from the first half of 2006; however, the 2006 expense included a recovery of $328,000 of previously incurred professional expenses. Finally, occupancy expenses increased $449,000 from the first half of 2006. In addition to the quarterly factors identified above, this increase is also attributed to the reconfiguration in the first quarter of 2007 of our Operations Center in Lakewood, Washington for more efficient use of the space. These expense increases were partially offset by lower data processing fees which decreased $200,000. The reduced data processing fees reflect cost savings from the conversion of our core banking system in the first quarter of 2006.

The following table presents selected items included in other noninterest expense and the associated change from period to period:


	Three months ended June 30,				Increase (Decrease)			Six months ended June 30,				Increase (Decrease)
	2007		2006		Amount			2007		2006		Amount
Core deposit intangible amortization	$	96	$	113	$	(17	)	$	192	$	226	$	(34	)
Software support & maintenance		209		192		17			389		351		38
Telephone & network communications		277		275		2			550		575		(25	)
Federal Reserve Bank processing fees		127		229		(102	)		240		432		(192	)
Supplies		289		257		32			577		607		(30	)
Postage		280		291		(11	)		571		643		(72	)
Investor relations		83		90		(7	)		158		135		23
Travel		120		89		31			199		144		55
ATM network		153		143		10			290		297		(7	)
Sponsorships & charitable contributions		169		269		(100	)		256		432		(176	)
Regulatory premiums		66		68		(2	)		108		138		(30	)
Directors fees		105		108		(3	)		215		219		(4	)
Employee expenses		149		160		(11	)		320		304		16
Insurance		109		115		(6	)		219		236		(17	)
Losses on CRA investments (1)		107		369		(262	)		288		369		(81	)
Miscellaneous		650		855		(205	)		1,251		1,476		(225	)

Total other non-interest expense	$	2,989	$	3,623	$	(634	)	$	5,823	$	6,584	$	(761	)

(1)	A substantial portion, $227,000 for the six months ended June 30, 2007, of these losses is offset by credits taken as a reduction in our current period income tax expense.

Our efficiency ratio [noninterest expense divided by the sum of net interest income and noninterest income on a tax equivalent basis, excluding gain (loss) on sale of investment securities, net cost (gain) of OREO, and mark-to-market adjustments of interest rate floor instruments] was 60.04% for the second quarter 2007 and was 61.68% for the first six months of 2007, compared to 60.97% and 59.81% for the second quarter and first six months of 2006, respectively. The year-to-date change in the efficiency ratio is due to increases in noninterest expense relative to total revenue. Noninterest expense for the period has increased faster than total revenue, in part, due to not yet realizing the full earnings benefit from our investment in additional banking teams made during the first quarter of the year.

Reconciliation of Financial Data to GAAP Financial Measures


	Three Months Ended June 30,						Six Months Ended June 30,
*(in thousands)*	2007			2006			2007			2006
Net interest income (1)	$	25,695		$	24,302		$	50,398		$	48,608
Tax equivalent adjustment for non-taxable investment securities interest income (2)		1,075			968			2,150			1,760

Adjusted net interest income	$	26,770		$	25,270		$	52,548		$	50,368

Noninterest income	$	6,741		$	6,267		$	12,918		$	12,240
Gain on sale of investment securities, net		—			—			—			(10	)
Tax equivalent adjustment for BOLI income (2)		243			234			472			449

Adjusted noninterest income	$	6,984		$	6,501		$	13,390		$	12,679

Noninterest expense	$	20,266		$	21,136		$	40,668		$	39,476
Net gain on sale of OREO		—			11			—			11
Interest rate floor valuation adjustment		—			(1,775	)		—			(1,775	)

Adjusted noninterest expense	$	20,266		$	19,372		$	40,668		$	37,712

Efficiency ratio (fully taxable-equivalent)		60.04	%		60.97	%		61.68	%		59.81	%
Statutory Tax Rate		35.00	%		35.00	%		35.00	%		35.00	%

(1)	Amount represents net interest income before provision for loan losses.

(2)	Fully taxable-equivalent basis: Non taxable revenue is increased by the statutory tax rate to recognize the income tax benefit of the income realized.

Income Taxes

We recorded an income tax provision of $3.3 million and $5.9 million for the second quarter and first six months of 2007, respectively, compared with a provision of $1.9 million and $5.5 million for the same periods in 2006. The effective tax rate for the second quarter of 2007 and 2006 was 28% and 21%, respectively, as well as 27% and 26% for the six months ended June 30, 2007 and 2006. For additional information, refer to the Company’s annual report on Form 10-K for the year ended December 31, 2006.

Credit Risk Management

The extension of credit in the form of loans or other credit products to individuals and businesses is one of our principal business activities. Our policies and applicable laws and regulations require risk analysis as well as ongoing portfolio and credit management. We manage our credit risk through lending limit constraints, credit review, approval policies, and extensive, ongoing internal monitoring. We also manage credit risk through diversification of the loan portfolio by type of loan, type of industry, type of borrower and by limiting the aggregation of debt limits to a single borrower. In analyzing our existing portfolio, we review our consumer and residential loan portfolios by their performance as a pool of loans since no single loan is individually significant or judged by its risk rating, size, or potential risk of loss. In contrast, the monitoring process for the commercial business, private banking, real estate construction, and commercial real estate portfolios includes periodic reviews of individual loans with risk ratings assigned to each loan and performance judged on a loan by loan basis. We review these loans to assess the ability of the borrower to service all of its interest and principal obligations and, as a result, the risk rating may be adjusted accordingly. In the event that full collection of principal and interest is not reasonably assured, the loan is appropriately downgraded and, if warranted, placed on nonaccrual status even though the loan may be current as to principal and interest payments. Additionally, we review these types of loans for impairment in accordance with SFAS No. 114, “Accounting by Creditors for the Impairment of a Loan”. Impaired loans are considered for nonaccrual status and will typically remain as such until all principal and interest payments are brought current and the prospects for future payments in accordance with the loan agreement appear relatively certain.

Loan policies, credit quality criteria, portfolio guidelines and other controls are established under the guidance of our Chief Credit Officer and approved, as appropriate, by the Board. Credit Administration, together with the loan committee, has the responsibility for administering the credit approval process. As another part of its control process, we use an internal credit review process independent of the lending and credit administration functions to provide assurance that loans and commitments are made and maintained as prescribed by its credit policies. This includes a review of documentation when the loan is initially extended and subsequent monitoring to assess continued performance and proper risk assessment.

Loan Portfolio Analysis

We are a full service commercial bank, originating a wide variety of loans, but concentrating our lending efforts on originating commercial business and commercial real estate loans.

The following table sets forth the Company’s loan portfolio by type of loan for the dates indicated:


*(in thousands)*	June 30, 2007			% of Total		December 31, 2006			% of Total
Commercial business	$	681,534		36.7	%	$	617,899		36.1	%
Real estate:
One-to-four family residential		46,299		2.5			51,277		3.0
Commercial and five or more family residential commercial properties		677,477		36.4			687,635		40.3

Total real estate		723,776		38.9			738,912		43.3
Real estate construction:
One-to-four family residential		180,925		9.7			92,124		5.4
Commercial and five or more family residential commercial properties		127,769		6.9			115,185		6.8

Total real estate construction		308,694		16.6			207,309		12.2
Consumer		148,869		8.0			147,782		8.6

Sub-total loans		1,862,873		100.2			1,711,902		100.2
Less: Deferred loan fees		(3,281	)	(0.2	)		(2,940	)	(0.2	)

Total loans	$	1,859,592		100.0	%	$	1,708,962		100.0	%

Loans held for sale	$	2,551				$	933

The majority of our loan growth since December 31, 2006 was in commercial business loans and one- to four-family residential construction. Loan growth of approximately 9% in the first half of 2007 was improved as compared to growth of approximately 4% in the same period in 2006.

Commercial Loans: We are committed to providing competitive commercial lending in our primary market areas. We believe that increases in commercial lending during the first half of 2007 were due to the confidence of business owners in the stability of our local economy as well as the contribution of our new commercial banking team added late in the fourth quarter of 2006 and the expansion of our Seattle private banking group during the current quarter. Management expects to continue to expand its commercial lending products and to emphasize, in particular, relationship banking with businesses, and business owners.

Real Estate Loans: These loans are used to collateralize outstanding advances from the FHLB. Generally, our policy is to originate residential loans for sale to third parties. Those residential loans are secured by properties located within our primary market areas, and typically have loan-to-value ratios of 80% or lower. In certain circumstances the loan amounts may exceed 80% if accompanied by private mortgage insurance. However, we do not underwrite residential real estate loans for the subprime market.

Generally, commercial and five-or-more family residential real estate loans are made to borrowers who have existing banking relationships with us. Our underwriting standards generally require that the loan-to-value ratio for these loans not exceed 75% of appraised value, cost, or discounted cash flow value, as appropriate, and that commercial properties maintain debt coverage ratios (net operating income divided by annual debt servicing) of 1.2 or better. However, underwriting standards can be influenced by competition and other factors. We endeavor to maintain the highest practical underwriting standards while balancing the need to remain competitive in our lending practices.

Real Estate Construction Loans: We originate a variety of real estate construction loans. One-to-four family residential construction loans are originated for the construction of custom homes (where the home buyer is the borrower) and to provide financing to builders for the construction of pre-sold homes and speculative residential construction. Growth in this sector of the portfolio is due to an increased emphasis on our Builder Banking program as well as the contribution of our new Builder Banking team added late in the fourth quarter of 2006.

Consumer Loans: Consumer loans include automobile loans, boat and recreational vehicle financing, home equity and home improvement loans and miscellaneous personal loans.

Foreign Loans: Our banking subsidiaries are not involved with loans to foreign companies or foreign countries.

Nonperforming Assets

Nonperforming assets consist of: (i) nonaccrual loans; (ii) in most cases restructured loans, for which concessions, including the reduction of interest rates below a rate otherwise available to that borrower or the deferral of interest or principal, have been granted due to the borrower’s weakened financial condition (interest on restructured loans is accrued at the restructured rates when it is anticipated that no loss of original principal will occur); (iii) other real estate owned; and (iv) other personal property owned. Collectively, nonaccrual and restructured loans are considered nonperforming loans.

Nonaccrual loans: The consolidated financial statements are prepared according to the accrual basis of accounting. This includes the recognition of interest income on the loan portfolio, unless a loan is placed on a nonaccrual basis, which occurs when there are serious doubts about the collectibility of principal or interest. Generally our policy is to discontinue the accrual of interest on all loans past due 90 days or more and place them on nonaccrual status.

At June 30, 2007 nonperforming loans increased 71% to 0.32% of period-end loans up from 0.20% of period-end loans at December 31, 2006. At June 30, 2007 we had $32,000 of other personal property owned compared to none at December 31, 2006. As such, total nonperforming assets increased 72% to 0.23% of period-end assets at June 30, 2007 up from 0.14% of period-end assets at December 31, 2006. The increase in nonperforming assets is primarily attributable to a single nonperforming lending relationship. In 2005, we advanced money for the construction of an office building in Oregon; the building has now been completed with the exception of certain tenant improvements. However, the loans became past due as the borrower encountered operational challenges including delays, cost overruns and the inability to lease up the building as

originally anticipated. We are pursuing our remedies in accordance with the loan agreements which evidence this transaction. At June 30, 2007, we believe the loans to be adequately secured by the underlying real estate and no loss is expected.

The following tables set forth, at the dates indicated, information with respect to our nonaccrual loans, restructured loans, total nonperforming loans and total nonperforming assets:


*(in thousands)*	June 30, 2007		December 31, 2006
Nonaccrual:
Commercial business	$	2,028	$	1,777
Real estate:
One-to-four family residential		277		366
Commercial and five or more family residential		677		217

Total real estate		954		583
Real estate construction:
Commercial and five or more family residential		1,913		—
Consumer		77		54

Total nonaccrual loans		4,972		2,414

Restructured:
Commercial business		985		1,066

Total nonperforming loans		5,957		3,480

Other personal property owned		32		—

Total nonperforming assets	$	5,989	$	3,480

The remaining nonperforming assets are centered in a small number of lending relationships which management considers adequately reserved. Generally, these relationships are well collateralized though loss of principal on certain of these loans will remain in question until the loans are paid or collateral is liquidated. The Company will continue its collection efforts and liquidation of collateral to recover as large a portion of the nonaccrual assets as possible. Substantially, all nonperforming loans are to borrowers within the state of Washington.

Allowance for Loan and Lease Losses

At June 30, 2007, our allowance for loan and lease losses (“ALLL”) was $21.3 million, or 1.15% of total loans (excluding loans held for sale) and 358% and 356% of nonperforming loans and nonperforming assets, respectively. This compares with an allowance of $20.2 million, or 1.18% of the total loan portfolio (excluding loans held for sale) and 580% of both nonperforming loans and nonperforming assets at December 31, 2006. As noted above, the increase in nonperforming loans at June 30, 2007 is primarily attributable to a single lending relationship in Oregon. As no loss is expected from those nonperforming loans, a corresponding increase in the ALLL is not warranted.

There have been no significant changes during the first six months of 2007 in estimation methods or assumptions that affected our methodology for assessing the appropriateness of the ALLL. Adjustments to the percentages of the allowance allocated to loan categories are made based on trends with respect to delinquencies and problem loans within each pool of loans. The Company maintains a conservative approach to credit quality and will continue to prudently add to its loan and lease loss allowance as necessary in order to maintain adequate reserves. The Company’s credit quality measures remained strong in the first half of 2007. Management carefully monitors and evaluates the loan portfolio and continues to emphasize credit quality and strengthening of its loan monitoring systems and controls.

In addition to the ALLL, we maintain an allowance for unfunded loan commitments and letters of credit. We report this allowance as a liability on our consolidated balance sheet. We determine this amount using estimates of the probability of the ultimate funding and losses related to those credit exposures. This methodology is similar to the methodology we use for determining the adequacy of our ALLL. At June 30, 2007 and December 31, 2006, our allowance for unfunded loan commitments and letters of credit was $339,000. There was no provision during the first six months of either 2007 or 2006.

The following table provides an analysis of the Company’s allowance for loan and lease losses at the dates and the periods indicated:


	Three Months Ended June 30,						Six Months Ended June 30,
*(in thousands)*	2007			2006			2007			2006
Beginning balance	$	20,819		$	20,691		$	20,182		$	20,829
Charge-offs:
Commercial business		(98	)		(90	)		(194	)		(106	)
Commercial real estate		—			—			—			—
Consumer		(77	)		(50	)		(132	)		(475	)

Total charge-offs		(175	)		(140	)		(326	)		(581	)
Recoveries:
Commercial business		311			136			408			165
Commercial real estate		3			47			12			55
Real estate construction: One-to-four family residential		—			—			—			7
Consumer		52			6			96			50

Total recoveries		366			189			516			277

Net recoveries (charge-offs)		191			49			190			(304	)
Provision charged to expense		329			250			967			465

Ending balance	$	21,339		$	20,990		$	21,339		$	20,990

Total loans, net at end of period (1)	$	1,859,592		$	1,625,255		$	1,859,592		$	1,625,255

Allowance for loan losses to total loans		1.15	%		1.29	%		1.15	%		1.29	%

(1)	Excludes loans held for sale

During the second quarter of 2007, the Company had net loan recoveries of $191,000, compared to $49,000 in the same period of 2006. For the first six months of 2007, the Company had net loan recoveries of $190,000, compared to net loan charge-offs of $304,000 during the same period of 2006.

Securities

Approximately 99% of our securities are classified as available for sale and carried at fair value. These securities are used by management as part of our asset/liability management strategy and may be sold in response to changes in interest rates or significant prepayment risk. In accordance with our investment strategy, management monitors market conditions with a view to realize gains on its available for sale securities portfolio when prudent. At June 30, 2007 and December 31, 2006, the market value of securities available for sale had an unrealized loss, net of tax, of $7.9 million and $3.8 million, respectively. The change in market value of securities available for sale is due primarily to fluctuations in interest rates.

The following table sets forth our securities portfolio by type for the dates indicated:


	June 30, 2007		December 31, 2006
	(in thousands)
Securities Available for Sale
U.S. Government-sponsored enterprise	$	60,908	$	75,452
U.S. Government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations		309,081		325,096
State and municipal securities		185,490		189,958
Other securities		3,237		2,352

Total	$	558,716	$	592,858

Securities Held to Maturity
State & municipal securities	$	1,573	$	1,822

Liquidity and Sources of Funds

Our primary sources of funds are customer deposits. Additionally, we utilize advances from the Federal Home Loan Bank of Seattle (the “FHLB”) and wholesale repurchase agreements to supplement our funding needs. These funds, together with loan repayments, loan sales, retained earnings, equity and other borrowed funds are used to make loans, to acquire securities and other assets, and to fund continuing operations.

Deposit Activities

Our deposit products include a wide variety of transaction accounts, savings accounts and time deposit accounts. Core deposits (demand deposit, savings, and money market accounts) remained stable at $1.47 billion at June 30, 2007 and certificate of deposit balances increased $95.5 million, or 17% compared to year-end 2006. Average core deposits increased to $1.49 billion during the second quarter of 2007 from $1.44 billion in the first quarter of 2007.

Competitive pressure from banks in our market areas with a strained liquidity posture may slow our deposit growth but, in the long-term, we anticipate continued growth in our core deposits through both the addition of new customers and our current client base. However, obtaining this growth may cost us more than in the past as deposit rates available in our market areas continue to trend upward.

We have established a branch system to serve our consumer and business depositors. In addition, management’s strategy for funding asset growth is to make use of brokered and other wholesale deposits on an as-needed basis. At June 30, 2007 brokered and other wholesale deposits (excluding public deposits) totaled $60.5 million or 3% of total deposits compared to $10.5 million, or less than 1% of total deposits, at year-end 2006. The brokered deposits have varied maturities.

The following table sets forth the Company’s deposit base by type of product for the dates indicated:


Deposit Composition	June 30, 2007		December 31, 2006		June 30, 2006
Demand and other noninterest bearing	$	419,695	$	432,293	$	446,568
Interest bearing demand		440,051		414,198		367,891
Money market		509,463		516,415		488,615
Savings		102,997		110,795		115,239
Certificates of deposit		645,119		549,650		544,435

Total deposits	$	2,117,325	$	2,023,351	$	1,962,748

Borrowings

We rely on FHLB advances as another source of both short and long-term borrowings. FHLB advances are collateralized by one-to-four family real estate mortgages, investment securities and certain other assets. At June 30, 2007, we had FHLB advances of $161.7 million, compared to advances of $205.8 million at December 31, 2006.

We also utilize wholesale repurchase agreements as a supplement to our funding sources. Wholesale repurchase agreements are secured by mortgage-backed securities. At June 30, 2007, we had repurchase agreements of $70.0 million, compared to agreements of $20.0 million at December 31, 2006. Management anticipates that we will continue to rely on both FHLB advances and wholesale repurchase agreements in the future, and we will use those funds primarily to make loans and purchase securities.

During 2001, the Company, through a special purpose trust (“the Trust”) participated in a pooled trust preferred offering, whereby the Trust issued $22.0 million of 30 year floating rate capital securities. The capital securities constitute guaranteed preferred beneficial interests in debentures issued by the Trust. The debentures had an initial rate of 7.29% and a rate of 8.94% at June 30, 2007. The floating rate is based on the 3-month LIBOR plus 3.58% and is adjusted quarterly. Through the Trust, we may call the debentures at any time for a premium and after ten years at par, allowing us to retire the debt early if market conditions are favorable.

The trust preferred obligations are classified as long-term subordinated debt and our related investment in the Trust is recorded in other assets on the consolidated balance sheets. The balance of the long-term subordinated debt was $22.4 million at June 30, 2007 and December 31, 2006. The subordinated debt payable to the Trust is on the same interest and payment terms as the trust preferred obligations issued by the Trust.

Additionally, we have a $20.0 million line of credit with a large commercial bank with an interest rate indexed to LIBOR. At June 30, 2007 and December 31, 2006 there was no balance outstanding on the line of credit. In the event of discontinuance of the line by either party, we have up to two years to repay any outstanding balance.

Contractual Obligations & Commitments

The Company is party to many contractual financial obligations, including repayment of borrowings, operating and equipment lease payments, commitments to extend credit and investments in affordable housing partnerships. At June 30, 2007, the Company had commitments to extend credit of $755.8 million compared to $764.3 million at December 31, 2006.

Capital Resources

Shareholders’ equity at June 30, 2007 was $259.8 million, up 3% from $252.3 million at December 31, 2006. The increase is due primarily to net income of $15.8 million for the first six months of 2007. Shareholders’ equity was 9.8% and 9.9% of total period-end assets at June 30, 2007, and December 31, 2006, respectively.

Capital Ratios: Banking regulations require bank holding companies to maintain a minimum “leverage” ratio of core capital to adjusted quarterly average total assets of at least 3%. In addition, banking regulators have adopted risk-based capital guidelines, under which risk percentages are assigned to various categories of assets and off-balance sheet items to calculate a risk-adjusted capital ratio. Tier I capital generally consists of common shareholders’ equity and trust preferred obligations, less goodwill and certain identifiable intangible assets, while Tier II capital includes the allowance for loan losses and subordinated debt, both subject to certain limitations. Regulatory minimum risk-based capital guidelines require Tier I capital of 4% of risk-adjusted assets and total capital (combined Tier I and Tier II) of 8% to be considered “adequately capitalized”.

Federal Deposit Insurance Corporation regulations set forth the qualifications necessary for a bank to be classified as “well capitalized”, primarily for assignment of FDIC insurance premium rates. To qualify as “well capitalized,” banks must have a Tier I risk-adjusted capital ratio of at least 6%, a total risk-adjusted capital ratio of at least 10%, and a leverage ratio of at least 5%. Failure to qualify as “well capitalized” can negatively impact a bank’s ability to expand and to engage in certain activities.

The Company and its subsidiaries qualify as “well-capitalized” at June 30, 2007 and December 31, 2006.


	Company				Columbia Bank				Astoria				Requirements
	6/30/2007		12/31/2006		6/30/2007		12/31/2006		6/30/2007		12/31/2006		Adequately capitalized		Well- capitalized
Total risk-based capital ratio	12.83	%	13.23	%	12.15	%	12.50	%	12.00	%	11.98	%	8	%	10	%
Tier 1 risk-based capital ratio	11.83	%	12.21	%	11.17	%	11.48	%	10.78	%	10.93	%	4	%	6	%
Leverage ratio	9.82	%	9.86	%	9.32	%	9.32	%	8.76	%	8.48	%	4	%	5	%

Stock Repurchase Program

In March 2002 the Board of Directors approved a stock repurchase program whereby the Company may systematically repurchase up to 500,000 of its outstanding shares of Common Stock. The Company may repurchase shares from time to time in the open market or in private transactions, under conditions which allow such repurchases to be accretive to earnings while maintaining capital ratios that exceed the guidelines for a well-capitalized financial institution. As of June 30, 2007 the Company had not repurchased any shares of common stock in this current stock repurchase program.

Item 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

A number of measures are used to monitor and manage interest rate risk, including income simulations and interest sensitivity (gap) analyses. An income simulation model is the primary tool used to assess the direction and magnitude of changes in net interest income resulting from changes in interest rates. Basic assumptions in the model include prepayment speeds on mortgage-related assets, cash flows and maturities of other investment securities, loan and deposit volumes and pricing. These assumptions are inherently subjective and, as a result, the model cannot precisely estimate net interest income or precisely predict the impact of higher or lower interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes and changes in market conditions and management strategies, among other factors. At June 30, 2007, based on the measures used to monitor and manage interest rate risk, there has not been a material change in the Company’s interest rate risk since December 31, 2006. For additional information, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operation” referenced in the Company’s 2006 Annual Report on Form 10-K.

Item 4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

An evaluation was carried out under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934). Based on that evaluation, the CEO and CFO have concluded that as of the end of the period covered by this report, our disclosure controls and procedures are effective in ensuring that the information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934 is (i) accumulated and communicated to our management (including the CEO and CFO) to allow timely decisions regarding required disclosure, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Changes in Internal Controls Over Financial Reporting

There was no change in our internal controls over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

PART II - OTHER INFORMATION

Item 1.

LEGAL PROCEEDINGS

The Company and its banking subsidiaries are parties to routine litigation arising in the ordinary course of business. Management believes that, based on the information currently known to them, any liabilities arising from such litigation will not have a material adverse impact on the Company’s financial condition, results of operations or cash flows.

Item 1A.

RISK FACTORS

There have been no material changes from risk factors previously disclosed in the Company’s 2006 Annual Report on Form 10-K.

Item 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

Item 3.

DEFAULTS UPON SENIOR SECURITIES

None.

Item 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Company held its annual shareholders meeting on April 25, 2007. The following is a brief description and vote count of the proposal voted upon at the annual meeting.

Proposal. ELECTION OF DIRECTORS

All nine persons nominated were elected to hold office for the ensuing year.


Nominee	Votes “For”	Votes “Withheld”
Melanie J. Dressel	14,171,696	67,160
John P. Folsom	13,648,395	590,461
Frederick M. Goldberg	14,170,755	68,101
Thomas M. Hulbert	13,940,952	297,904
Thomas L. Matson, Sr.	14,173,373	65,483
Daniel C. Regis	13,914,035	324,821
Donald Rodman	14,025,265	213,591
William T. Weyerhaeuser	14,003,838	235,018
James M. Will	13,398,539	840,317

Item 5.

OTHER INFORMATION

None.

Item 6.

EXHIBITS


31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32		Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	COLUMBIA BANKING SYSTEM, INC.

Date: August 3, 2007	By	/s/ MELANIE J. DRESSEL
		Melanie J. Dressel
		President and Chief Executive Officer (Principal Executive Officer)

Date: August 3, 2007	By	/s/ GARY R. SCHMINKEY
		Gary R. Schminkey
		Executive Vice President and Chief Financial Officer (Principal Financial Officer)

Date: August 3, 2007	By	/s/ CLINT E. STEIN
		Clint E. Stein
		Senior Vice President and Chief Accounting Officer (Principal Accounting Officer)

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents